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Oil, equities and US interest rates push HFRI FWC to record value level in December

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Hedge funds posted gains across all strategies in December, with the HFRI Fund Weighted Composite Index (FWC) rising to a record index value level as oil prices surged, equities gained and US interest rates increased into year end.

According to data from HFR, the FWC advanced 1.1 per cent in the month, bringing the annual return to +5.6  per cent and the Index Value to 12,966, surpassing the prior record from May 2015 and the highest value since inception in January 1990. The HFRI Asset Weighted Composite Index (AWC) meanwhile, also gained 1.1  per cent in December. In a year dominated by the dual political financial market dislocations of Brexit and the US Presidential election, the HFRI FWC gain topped the gain of global equities, as represented by the MSCI World Index.

Equity and credit-sensitive Event Driven (ED) strategies – including M&A, Special Situations and Distressed – led industry performance for December and 2016. The HFRI Event Driven (Total) Index gained 1.5  per cent in the month and 10.2  per cent for the year, the strongest annual gain since 2013. All ED sub-strategies climbed in December, led by the HFRI Activist and ED: Multi-Strategy Indices, which each gained +2.5  per cent. For 2016, the HFRI Distressed and Special Situations Indices led sub-strategy performance with gains of 13.4 and 11.6  per cent, respectively, both posting their strongest calendar year gains since 2013. The HFRI Activist and HFRI Credit Arbitrage Indices each gained 10.5  per cent for 2016.

Fixed income-based Relative Value Arbitrage (RVA) strategies also advanced for December and 2016, with the HFRI Relative Value (Total) Index gaining 1.2  per cent for the month, bringing the YTD return to +7.8  per cent. RVA sub-strategy performance was led by Yield Alternative strategies, which includes Energy Infrastructure, MLP and Real Estate exposures; the HFRI RV: Yield Alternatives Index advanced 2.6  per cent in December and 17.6  per cent for 2016. Hedge funds investing in corporate bonds also posted strong performance, with the HFRI RV: Fixed Income-Corporate Index gaining 1.9 for December and 11.7  per cent for the year.

Long short Equity Hedge (EH) strategies advanced in both December and 2016, with the HFRI Equity Hedge (Total) Index gaining 0.9  per cent for the month and  5.5  per cent for the year, as global equities rallied to conclude a strong Q4. EH sub-strategy performance for December was led by quant strategies, with the HFRI EH: Quantitative Directional Index up 1.7  per cent. The HFRI EH: Energy/Basic Materials Index added 0.5  per cent in December,  concluding the year up 18.7  per cent, leading not only EH sub-strategy performance, but all sub-strategy performance.

Macro hedge funds gained in December as interest rates rose and energy commodities surged, though Macro produced only a small gain for 2016. The HFRI Macro (Total) Index climbed 1.2  per cent in December, led by Energy exposures and CTA strategies, bringing its 2016 gain to 1.5  per cent. The HFRI Macro (Asset Weighted) Index produced a slightly higher gain of 1.3  per cent in December. Despite strong performance early in the year and through the Brexit turmoil, quantitative, trend following CTA strategies posted a disappointing decline in 2016; the HFRI Macro: Systematic Diversified Index gained 1.2  per cent for December, paring the decline for the year to 1.0  per cent. Out of 27 HFRI sub-strategy indices calculated by HFR, HFRI Macro: Systematic Diversified was the only index to decline for 2016. Macro sub-strategy performance in 2016 was led by commodity exposures, with the HFRI Macro: Commodity Index advancing 5.2  per cent.

“Like US equities, the HFRI reached a record high in December, benefitting from post-election optimism, surging commodities and despite increases in US fixed income yields. This record level of HFRI performance also coincides with record hedge fund assets reached in 3Q16,” says Kenneth J Heinz (pictured), President of HFR. “Following a disappointing decline in 2015, hedge fund performance in 2016 was the highest since 2013 and not only tops indices of global equities, but also the annualised HFRI performance over the last 5 and 10 years. The recent (post-election) increase in investor risk tolerance is likely to drive continued performance and capital gains into mid-2017.”

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